RD33 - Virginia Retirement System Comprehensive Annual Financial Report for the Year Ended June 30, 2016

Executive Summary:
I am pleased to present the Virginia Retirement System (VRS) Comprehensive Annual Financial Report for fiscal year 2016. VRS achieved a 1.9% net return on its investment portfolio for fiscal year 2016, exceeding the benchmark return and allowing the trust fund to end the year with a net position of $68.2 billion.

During fiscal year 2016, the private equity program returned 6.6%; the real assets program returned 11.6%; the credit strategies program returned 1.2%; the fixed income program returned 6.8%; the public equity program returned -3.2%; and the strategic opportunities portfolio returned -2.4%. The portfolio included $27.1 billion in public equity, $12.5 billion in credit strategies, $12.0 billion in fixed income, $8.8 billion in real assets, $5.2 billion in private equity and $1.1 billion in the strategic opportunities portfolio, as of June 30, 2016.

Approximately 35% of the fund is managed internally and 65% of the fund is managed externally under VRS supervision. The VRS investment team’s expertise provides considerable added value and fee savings for VRS members, retirees and beneficiaries. CEM Benchmarking, a firm specializing in benchmarking pension funds and other large pools of capital, reports that the skill exhibited by the VRS investment team in performing its internal and external investment functions in comparison with its public fund peers saves the portfolio about $26 million annually in fees paid.

VRS is now in the fourth year of a five-year phase-in to a new asset allocation policy for the trust fund, in which we are increasing assets allocated to private equity and real assets and decreasing assets allocated to fixed income and credit strategies. Our goal is to achieve slightly higher returns at similar risk levels.

The VRS Board of Trustees takes an active role in setting policy as part of our fiduciary responsibility to those we serve. Although returns are subject to market conditions and may increase or decrease from year to year, we are in the market for the long term, not merely a five- or 10-year period, and we set policy with a wider perception of the broader time horizon.

VRS’ funding levels continued to improve due to investment gains, as well as your support by increasing contributions to the plans. As of June 30, 2016, the Plan Fiduciary Net Position stood at 83.67% for local political subdivisions (aggregate); 71.29% for state employees; 75.19% for judges; 68.28% for teachers; 67.20% for state police and 61.01% for Virginia law officers.

I wish to commend you for two significant actions during this fiscal year that are major advances toward full funding of contribution rates.

The 2016-17 budget contains an appropriation of $189 million to accelerate and complete the 10-year repayment of the 2010-2012 biennium deferred contributions to the state plans. This repayment reduces the retirement contribution rates for state employees, State Police Officers’ Retirement System (SPORS), Virginia Law Officers’ Retirement System (VaLORS) and Judicial Retirement System (JRS) in fiscal years 2017-18, and will save approximately $26.5 million in contributions over the next five years. It follows a special contribution of $193 million to the teacher plan in 2015 toward the repayment of deferred contributions, which will save employers approximately $34 million in contributions over the next five years.

The Appropriation Act also accelerates the full funding of contribution rates ahead of schedule. The act funds 100% of the VRS board-certified contribution rates in fiscal years 2017 and 2018 for state employees, SPORS, VaLORS and JRS. As a result, these plans are expected to recognize $122 million in long-term savings over the next two decades. The act also funds 100% of the VRS-board certified other post-employment benefits (OPEBs) contribution rates in fiscal years 2017 and 2018 for the health insurance credit for state employees, group life insurance for state employees and the Virginia Sickness and Disability Program (VSDP). The act funds 89.84% of the board-certified contribution rates for the teacher plan in fiscal year 2017 and provides 100% funding of the rates in fiscal year 2018. As a result, the teacher plan is expected to recognize $110 million in long-term savings over the next two decades. The act also funds 100% of the board-certified rates in fiscal years 2017 and 2018 for the employer share of group life insurance for teachers. And it funds 90% of board-certified contribution rates for the health insurance credit for teachers in fiscal year 2017, which rises to 100% funding in fiscal year 2018.

Starting with the Governor’s budget proposal and continuing with the actions of the General Assembly, you demonstrated a unified commitment to strengthening the retirement system – a meaningful and tangible commitment that continues to be viewed positively by members, beneficiaries and other stakeholders. Not only are you meeting established goals, but you are accelerating their achievement well ahead of schedule. We are pleased that you recognize the importance of our shared goal of fully funding the rates.

On the administrative side, VRS moved forward with the launch of the enhanced myVRS website in spring 2016, offering online requests for refunds. With this step, we are opening the door for VRS members to perform more self-service transactions while taking advantage of retirement planning resources. We are tailoring education and counseling for members based on information in their records, aiding them in making informed decisions at each stage of their careers.

Additional self-service functionality for members will be released in 2017 and 2018, including the ability to purchase prior service, update beneficiaries and apply online for retirement benefits. As these releases launch, VRS is deploying a complement of identity authentication processes to help ensure the security of members’ personal and financial account information.

In short, we are building a foundation to help members plan for tomorrow, today, by providing our members with additional channels for counseling information and opportunities for them to interact with VRS for answers to their questions throughout their careers.

VRS also continues to support participating employers with regular communications and resources to aid them in counseling members and financial reporting. In June 2015, the Governmental Accounting Standards Board (GASB) released two statements aimed at improving financial reporting by state and local governments of other post-employment benefits (OPEBs), such as group life and retiree health insurance credit: Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. To aid employers in meeting these and other standards set by GASB, VRS continues to maintain an online resource center that includes financial reporting guidelines and resources, GASB audit opinions and disclosure guidance, contribution rates and valuation reports.

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to VRS for the Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2015. This was the 34th consecutive year that VRS achieved this prestigious recognition.

VRS also received the 2015 Recognition Award for Administration from the Public Pension Coordinating Council (PPCC) in recognition of the agency’s fulfillment of the public pension standards. Developed by PPCC, these standards are the benchmark for measuring excellence in defined benefit plan administration. This is the system’s 12th award from PPCC.

For its ongoing campaign to encourage Hybrid Retirement Plan members to increase voluntary contributions, VRS received a Leadership Award in the participant education/ effective communication category from the National Association of Government Defined Contribution Administrators (NAGDCA).

I am honored to continue my service as VRS Board Chairman, working with a distinguished board of trustees. I know that I speak for the entire board when I say we are grateful for the opportunity to serve VRS members, employers and retirees.

On behalf of the Board of Trustees and the VRS staff, I would like to thank you for your leadership and continuing support of our efforts. By working together, we ensure that the beneficiaries of the Virginia Retirement System have financial security in their retirement years.


/s/ Robert L. Greene
Virginia Retirement System